The formation of lecithin:cholesterol 2:1 complexes in water has been shown to be responsible for two phenomena that in the past have been poorly understood, but which have had an important influence on the current ideas of the effect of cholesterol on membrane structure and function. The first is the "condensing" effect of cholesterol on lecithin films, and the second is the decrease in non-electrolyte permeability upon addition of cholesterol to multilamellar lecithin bilayers in water dispersions. In each case the presence of 2:1 complex has been able to account quantitatively for the phenomenon. In general the presence of cholesterol and phospholipids at compositions other than the 2:1 ratio of the complex will result in the formation of two phases: complex and the pure phase of the other component which is in excess. Cell membranes whose cholesterol content is varied will therefore have their lipids in a heterogeneous state. Analysis of the internal energies of phospholipids in a variety of thin film states of aggregation indicates that the hydrocarbon moieties are liquid-like under conditions which are typical for biological systems. BIBLIOGRAPHIC REFERENCES; Horn, L.W. and Gershfeld, N.L.: Equilibrium and metastable states of lecithin. Biophys. J. 18:301-310, 1977. Gershfeld, N.L. and Tajima, K.: Energetics of the transition between lecithin monolayers and bilayers. J. Colloid Interface Sci. 59:597-604, 1977.